MCQs

1. d [clause 1 part ii second schedule]

2. a [25 hrs a week]

Descriptive Ques

1. Engagement-specific safeguards in the work environment may include:

• Assigning additional time and qualified personnel to required tasks when an engagement has been
accepted might address a self-interest threat.
• Having an appropriate reviewer, who was not a member of the team, review the work performed
or advise as necessary might address a self-review threat.
• Using different partners and engagement teams with separate reporting lines for the provision of
non-assurance services to an assurance client might address self-review, advocacy or familiarity
threats.
• Involving another firm to perform or re-perform part of the engagement might address self-
interest, self-review, advocacy, familiarity or intimidation threats.
• Separating teams when dealing with matters of a confidential nature might address a self-interest
threat. [Any 4 points]

2. As per Clause (11) of Part I of First Schedule of Chartered Accountants Act, 1949, a Chartered
Accountant in practice is deemed to be guilty of professional misconduct if he engages in any business
or occupation other than the profession of Chartered Accountant unless permitted by the Council so
to engage.
Provided nothing contained herein shall disentitle a chartered accountant from being a director of a
company (not being MD or whole-time director) unless he or his partners is interested in such company
as auditor. [1 Mark]

The Ethical Standards Board (ESB) noted that Public conscience is expected to be ahead of law.
Members, therefore, are expected to interpret the requirement as regards independence much more
strictly than what the law requires and should not place themselves in positions which would either
compromise or jeopardise their independence. In the view of the above, the Board, via a clarification,
decided that the auditor of a Subsidiary company cannot be a Director of its Holding company, as it
will affect the independence of the auditor. [1 Mark]

However, the Council has granted general permission to the members to engage in certain specific
occupation. In respect of all other occupations specific permission of the Institute is necessary. ‘acting
as Recovery Consultant in the banking sector’ is covered under general permission. [1m]

In the given situation, M/s SS limited is a partly owned subsidiary of M/s HH limited. For the upcoming
financial year, M/s DD & Co., Chartered Accountants, were appointed as the statutory auditors of SS
limited. The CEO of the holding company was impressed with the knowledge and experience of Mr. D,
one of the partners of the firm and hence, he offered Mr. D to take up the position of Director (not
MD/ whole-time director) of HH limited. Further, Mr. D’s friend approached him for an assignment for
acting as a Recovery Consultant for a bank.

Therefore, in view of above in the given case, Mr. D should not accept the offer to be appointed as
director of HH Limited.

However, he can accept the assignment offered by his friend and can act as a recovery consultant for
a bank. [1M]

3. Submitting Wrong Information to the Institute: As per Clause (3) of Part II of the Second Schedule
to the Chartered Accountants Act, 1949, a member of the Institute, whether in practice or not, shall
be deemed to be guilty of professional misconduct if he includes in any information, statement, return
or form to be submitted to the Institute, Council or any of its committees, Director (Discipline), Board
of Discipline, Disciplinary Committee, Quality Review Board or the Appellate Authority any particulars
knowing them to be false. [2M]

In the instant case, Mr. P and Mr. Q, partners of PQ & Co., included the name of Mr. R, another
Chartered Accountant, as partner in their firm, without his knowledge, in their application for
empanelment as auditor of branches of Public Sector Banks submitted to the Institute. However, such
a member was not a partner of the said firm as on the date of application submitted. Here, Mr. P and
Mr. Q have submitted wrong information to the Institute. [1M]

Therefore, Mr. P and Mr. Q, both, would be held guilty of professional misconduct under Clause (3) of
Part II of the Second Schedule to the Chartered Accountants Act, 1949. [1M]

4. Bringing Disrepute to the Profession: A Chartered Accountant is expected to maintain the highest
standard of integrity even in his personal affairs and any deviation from these standards, even in his
non-professional work would expose him to disciplinary action. [1M]

A member is liable to disciplinary action under Section 21 of the Chartered Accountants Act, if he is
found guilty of any professional or “Other Misconduct”.

As per Clause (2) of Part IV of the First Schedule to the Chartered Accountants Act, 1949, a member
of the Institute, whether in practice or not, shall be deemed to be guilty of other misconduct, if he in
the opinion of the Council, brings disrepute to the profession or the Institute as a result of his action
whether or not related to his professional work. The question whether a particular act or omission
constitutes “other misconduct” should be based on fact and circumstances of each case. [1M]

Under Negotiable Instruments Act 1881, where any cheque drawn by a person for the discharge of any
liability is returned by the bank unpaid, either for insufficiency of funds or the cheque amount exceeds
the arrangements made by the drawer of the cheque, the drawer of such cheque shall be deemed to
have committed an offence. [1M]
In the given case the cheque was dishonoured with the remark “refer to drawer”. However, such
dishonour need not necessarily be only due to insufficiency of funds.

If it is proved that the cheques were dishonoured due to insufficiency of funds, the CA P would be
held guilty of “other misconduct”. [1M]

5. Delegation of Authority to the Employee: As per Clause (12) of Part I of the First Schedule of the
Chartered Accountants Act, 1949, a Chartered Accountant in practice is deemed to be guilty of
professional misconduct “if he allows a person not being a member of the Institute in practice or a
member not being his partner to sign on his behalf or on behalf of his firm, any balance sheet, profit
and loss account, report or financial statements”. [1M]

In this case CA A proprietor of M/s A & Co., went to abroad and delegated the authority to another
Chartered Accountant Mr. Y, his employee, for taking care of routine matters of his office who is not
a partner but a member of the Institute of Chartered Accountants

Council has clarified that power to sign routine documents on which a professional opinion or
authentication is not required to be expressed may be delegated and such delegation will not attract
provisions of this clause like issue of audit queries during course of audit, asking for information or
issue of questionnaire, attending to routing matters in tax practice, subject to Sec 288 of Income Tax
Act etc. [1M]

(i) In the given case, Mr. Y, a chartered accountant being employee of M/s A & Co. has issued audit
queries which were raised during the course of audit. Here Y is right in issuing the query, since
the same falls under routine work which can be delegated by the auditor. Therefore, there is no
misconduct in this case as per Clause (12) of Part I of First schedule to the Act. [0.5M]
(ii) Further, issuance of production certificate to client under GST Act by Mr. Y being an employee
of M/s A & Co. (an audit firm), is not routine work and is outside his authorities. Thus, CA A is
guilty of professional misconduct under Clause (12) of Part I of First Schedule of the Chartered
Accountants Act, 1949. [0.5M]
(iii) In this instance, Mr. Y, CA employee of audit firm M/s A & Co. has attended the Income tax
proceedings for a client as authorized representative before Income Tax Authorities. Since the
council has allowed the delegation of such work, chartered accountant employee can attend to
routine matter in tax practice as decided by the council, subject to provisions of Section 288 of
the Income Tax Act. Therefore, there is no misconduct in this case as per Clause (12) of Part I of
First schedule to the Act. [1M]

6. According to Clause (7) of Part I of Second Schedule to the Chartered Accountants Act, 1949, a
Chartered Accountant in practice is deemed to be guilty of professional misconduct if he “does not
exercise due diligence or is grossly negligent in the conduct of his professional duties”. [1M]

It is a vital clause which usually gets attracted whenever it is necessary to judge whether the
accountant has honestly and reasonably discharged his duties. The expression negligence covers a wide
field and extends from the frontiers of fraud to collateral minor negligence. [1M]
In the instant case, CA. Nam &Co. did not exercise due diligence and is grossly negligent in the conduct
of his professional duties since it did not visit the site where the stock was lying and instead the firm
relied on the MIS report along with inspection reports and photographs of stock taken by the
employees of DEF Ltd, which is incorrect.

To conduct stock audit, ascertainment of existence and physical condition of stocks, cross tallying the
stock with Stock statement submitted by bank borrower, correct classification of stocks for valuation
purpose etc. is essential. Further submitting stock audit report without physically verifying the stock
amounts to gross negligence. [1M]

From the above, it can be concluded that Nam & Co. is guilty of professional misconduct under Clause
(7) of Part I of Second Schedule to the Chartered Accountants Act, 1949. [1M]

7. As per Clause (10) of Part I of Second Schedule to the Chartered Accountant Act, 1949, a Chartered
Accountant in practice will be deemed to be guilty of professional misconduct if he fails to keep moneys
of his client other than the fees or remuneration or money meant to be expended in a separate banking
account or to use such moneys for purposes for which they are intended within a reasonable time. [1M]

In the course of his engagement as a professional accountant, a member may be entrusted with moneys
belonging to his client. If he should receive such funds, it would be his duty to deposit them in a
separate banking account, and to utilize such funds only in accordance with the instructions of the
client or for the purposes intended by the client. [1M]

In this connection the Council has considered some practical difficulties of the members and the
following suggestion, among other suggestions, has been made to remove these difficulties: “An
advance received by a Chartered Accountant against services to be rendered does not fall under Clause
(10) of Part I of the Second Schedule” [1M]

In the given case, CA N was given an advance of ₹ 2 Lakhs against the estimated expenses of ₹ 2.50
Lakhs on visits to be conducted as a part of services rendered.

Applying the above, it can be concluded that CA N is not guilty of professional misconduct under
Chartered Accountants Act, 1949. [1M]